Deck 13: Money,banks,and the Federal Reserve

Question 1

Which of the following was NOT part of the financial deregulation of the 1970s and 1980s?

A)Banks could pay interest on checking accounts.
B)Banks could issue checkbooks for savings accounts.
C)Institutions other than banks could offer money-market mutual funds,from which checks could be written.
D)All of the above were part of the deregulation.

Answer 1

All of the above were part of the deregulation.

Question 2

The largest component of the M1 measure of money is

A)currency.
B)demand deposits.
C)other checking deposits.
D)money-market mutual funds.

Answer 2

other checking deposits.

Question 3

The decline in the transaction demand for money in the mid- and late 1970s

A)was accompanied by a fall in velocity.
B)was predicted by most economists.
C)may be partly explained by the development of money-market funds and other financial innovations.
D)was the result of the Federal Reserve's easy-money policy.

Answer 3

may be partly explained by the development of money-market funds and other financial innovations.

Question 4

The issuance of new stocks or bonds are examples of

A)indirect finance.
B)direct finance.
C)financial intermediation.
D)All of the above.

Question 5

Keynes' speculative demand for money arises because

A)individuals are continually trying to maximize their wealth and income.
B)money is necessary to finance transactions.
C)there are costs to switching between money and interest-earning assets.
D)capital gains on bonds held can be made when interest rates are rising.

Question 6

The quantity theory of money assumed

A)that an increase in prices causes a proportionate increases in real GDP.
B)a fall in the velocity of money causes a proportionate increase in the money supply.
C)a rise in money supply causes a proportionate fall in velocity.
D)the fraction of income people desire to hold in the form of money is a constant.

Question 7

In the long run,a 1% increase in real GDP tends to

A)cause a 1% increase in the demand for money.
B)cause a less than 1% increase in the demand for money.
C)cause a greater than 1% increase in the demand for money.
D)have virtually no effect on the demand for money,because the interest rate is the main determinant of the demand for money.

Question 8

If interest rates are falling,then,ceteris paribus,

A)bond holders are suffering capital losses.
B)bond prices are rising.
C)the liquidity demand for money will be falling.
D)income must be rising.

Question 9

A negotiable large-denomination certificate of deposit is an example of a

A)capital market instrument to finance capital acquisitions.
B)money market instrument to finance inventories and short-term receivables.
C)type of stock held by financial institutions.
D)type of stock held by individuals.

Question 10

Imagine a crude banking system based on a reserve of 100 gold coins,with circulating paper deposit claims on 500 gold coins.This situation is sustainable if,among other things,merchants ________ accept paper claims on gold as payment for their goods,and gold coins withdrawn from the banking system are ________ the system.

A)will,returned to
B)will,kept out of
C)will not,returned to
D)will not,kept out of

Question 11

According to the "square-root rule" of the transactions demand for money,the demand for money would

A)vary inversely with the interest rate.
B)be zero if there were no costs to switching between money and interest-earning assets.
C)vary less than proportionately with income.
D)All of the above are correct.

Question 12

A fixed money-supply rule will have the greatest stabilizing effect on output when

A)money demand is unstable and commodity demand is stable.
B)both money and commodity demand are unstable.
C)both money demand and commodity demand are stable.
D)the velocity of money is unstable.

Question 13

The kind of assets banks can hold as reserves are also called the economy's

A)checkable deposits.
B)money market funds.
C)high-powered money.
D)bankers' acceptances.

Question 14

The quantity equation makes the demand for money depend on

A)the unemployment rate and the level of interest rates.
B)the inflation rate and the unemployment rate.
C)interest rates and the unemployment rate.
D)None of these.

Question 15

The ________ measure of money contains items that are not direct media of exchange,such as ________.

A)M1,checkable deposits
B)M1,savings certificates
C)M2,checkable deposits
D)M2,savings certificates

Question 16

Fluctuations in the relative demand for checking deposits versus money-market mutual funds causes instability in the overall demand for

A)M1 but not M2.
B)M2 but not M1.
C)M2 and M1.
D)neither M1 nor M2.

Question 17

A policy of maintaining a fixed interest rate will have the greatest stabilizing effect on output when money demand is

A)stable.
B)unstable and commodity demand is unstable.
C)stable and commodity demand is unstable.
D)unstable and commodity demand is stable.

Question 18

Fluctuations in the relative demand for stock market mutual funds versus money-market mutual funds causes instability in the overall demand for

A)M1 but not M2.
B)M2 but not M1.
C)M2 and M1.
D)neither M1 nor M2.

Question 19

Given the quantity theory of money demand,a doubling of the money supply will lead to a

A)halving of the velocity of money.
B)doubling of the level of real output.
C)doubling of the level of nominal output.
D)rise in the level of interest rates.

Question 20

As an individual,you cannot participate in the financial markets to issue new stock or sell new bonds because

A)it is too costly for individual savers to research your credit worthiness.
B)you have a bad reputation.
C)your good reputation is insufficient to convince savers.
D)your bank has foreclosed on your automobile loan.

Question 21

Suppose an individual sells $500 worth of securities to the Fed and puts the proceeds of this sale under his mattress.Then,

A)the money supply will be unaffected.
B)the money supply will rise by $500.
C)the supply of high-powered money will rise by $500 but nothing will happen to the money supply.
D)demand deposits will rise by some multiple of $500,depending on the bank reserve-holding ratio.

Question 22

Prior to financial deregulation,the store of value and medium of exchange functions of money were maintained separate among asset classes because the regulatory agencies

A)precluded the payment of interest by checking accounts.
B)allowed the payment of interest by checking accounts.
C)specifically prohibited money market stock funds.
D)allowed the payment of interest on passbook savings accounts.

Question 23

Money is created through the banking processes of taking deposits and making loans if

A)the banks require individual depositors to hold "reserves."
B)the banks require individual borrowers to hold "reserves."
C)paper deposit receipts are not acceptable means of payment.
D)paper deposit receipts are accepted as a means of payment.

Question 24

High-powered money is

A)total deposits received by banks within the system.
B)reserves held by banks to meet withdrawals.
C)deposits divided by the reserve holding ratio.
D)the reserve holding ratio divided by the level of deposits.

Question 25

If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of deposits would be (assume that citizens prefer to keep 10% of their money as cash)

A)100/0.25 times 1.1 which is 440.
B)100/0.35 which is approximately 286.
C)100/0.35 times 1.1 which is approximately 314.
D)100/0.10 which is 1000.

Question 26

It is believed,by many,that the underground economy has grown in the United States in recent years causing c to increase and to be volatile.This event implies that the money multiplier should ________ and that the Fed should have a(n)________ job in controlling the money supply.

A)increase;easier
B)increase;more difficult
C)decrease;easier
D)decrease;more difficult

Question 27

If the LM curve is vertical,then

A)there is partial "crowding out" of an increase in government expenditures.
B)the increase in the money supply will have no impact on the level of real GNP.
C)the demand for money is highly sensitive to the interest rate.
D)the velocity of money is constant.

Question 28

The stock of high-powered money in the economy is $80 billion.The bank reserve-holding ratio is 0.12 and the public wishes to hold 10% of its deposits as cash.The level of bank deposits will be

A)$333 billion.
B)$100 billion.
C)$250 billion.
D)$200 billion.

Question 29

Figure 13-1
In Figure 13-1 above,which money demand curve reflects the introduction of interest-bearing checking accounts?

A)
B)
C)
D)

Question 30

As a result of the financial deregulation that allowed banks to issue new types of interest-bearing checking accounts

A)people are less willing to hold M1 at a given interest rate on alternative assets.
B)the demand for money M1 curve became more stable.
C)the demand for money M1 curve became vertical.
D)the demand for money M1 curve will shift to the right.

Question 31

M1 is a definition of money largely confined to which function(s)of money?

A)unit of account
B)store of value
C)medium of exchange
D)B and C.

Question 32

At Christmastime,individuals choose to hold more cash and fewer deposits to facilitate their Christmas shopping.This condition will

A)increase the money supply,for people will be spending more money.
B)have no effect on the money supply because people are just exchanging one form of money (deposits)for another form (cash).
C)reduce the money supply because there will be a drain of reserves out of the banks.
D)reduce the money supply,for all that cash is spent on Christmas presents.

Question 33

A share of stock might be included in the definition of the money supply since it serves which of the following functions of money?

A)unit of account and a store of value
B)store of value
C)medium of exchange since it can be easily sold
D)B and C are both correct.

Question 34

If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of deposits would be (assuming that all money is deposited in the banking system)

A)500.
B)450.
C)400.
D)350.

Question 35

The stock of high-powered money in the economy is $80 billion.The bank reserve-holding ratio is 0.12 and the public wishes to hold 10% of its deposits as cash.The money supply will be approximately

A)$363 billion assuming the 80 billion of high-powered money is held by banks.
B)$400 billion assuming the 80 billion of high-powered money is held by the Fed or in bank vaults.
C)$327 billion assuming the 80 billion of high-powered money is not held by the Fed or in bank vaults.
D)$425 billion assuming the 80 billion of high-powered money is held by banks.

Question 36

If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of money would be (assume that citizens prefer to keep 10% of their money)

A)100/0.25 which is 400.
B)(100)(1.35)which is 540 0.25.
C)(100)(1.1)which is approximately 314 0.35.
D)(100)(1.35)which is approximately 386 0.35.

Question 37

The supply of high-powered money is $100,000 and the money supply is $500,000.If every individual wishes to hold 5% of his or her deposits in the form of cash,then the bank reserve-holding ratio must be

A)0.25 if banks have made all loans acceptable by the Federal Reserve requirements.
B)0.20 if banks have not made all loans acceptable by the Federal Reserve requirements.
C)0.17 if banks have not made all loans acceptable by the Federal Reserve requirements.
D)0.16 for any of the legally required reserve amount.

Question 38

Suppose that the interest rate is so low that banks currently refuse to make loans.An increase in the supply of high-powered money will

A)have no effect on the money supply if all the new high-powered money ends up as bank reserves.
B)have no effect on the money supply if all the new high-powered money ends up as cash in the hands of the nonbank public.
C)raise the money supply depending on banks reserve-holding ratio.
D)All of the above are correct.

Question 39

M2 is a definition of money largely confined to which function(s)of money?

A)unit of account
B)store of value
C)medium of exchange
D)B and C are both correct.

Question 40

Suppose the proportion of deposits that individuals wish to hold as cash were to rise from 5% to 10%.Then,

A)the money supply will rise because people have more cash.
B)bank deposits will fall by the same amount as if the reserve-holding ratio had risen by 5 percentage points.
C)the supply of high-powered money will rise because cash has risen.
D)the money supply will change by the same amount as if the reserve-holding ratio had risen by 5 percentage points.

Question 41

Currently in the United States,banks count as their reserves

A)only the currency in their vault.
B)the currency in their vault plus their holding of Treasury securities.
C)only their holding of Treasury securities.
D)their liabilities against which they pay no interest.
E)the currency in their vault plus their deposits at the Federal Reserve.

Question 42

Which of the following institutions are NOT examples of financial intermediaries?

A)1st National Bank,Chemical National Bank,Chase Manhattan National Bank
B)Farmer's Credit Union,1st Mortgage Bank,IBM Credit Union
C)a Savings and Loan,New York Savings and Loan,First American Savings and Loan
D)the New York Stock Markets,Chicago and Pacific

Question 43

During a banking panic,c ________,e ________,and the money supply ________.

A)rises,rises,falls
B)rises,falls,is unaffected
C)falls,falls,is unaffected
D)falls,rises,rises
E)falls,falls,falls

Question 44

In the money-creation formula,the Fed exerts considerable control over

A)H and e.
B)c and e.
C)c alone.
D)H alone.
E)e alone.

Question 45

If e = 0.10,c = 0.20,and H = 440,the money supply at full multiplier expansion is

A)4400.
B)1467.
C)1760.
D)1907.
E)1173.

Question 46

The simplest money-creation multiplier is equal to

A)eD.
B)H/e.
C)1/e.
D)e/H.
E)H/D.

Question 47

For every dollar's worth of government securities the Fed sells,the money supply

A)rises by more than $1.
B)rises by less than $1.
C)falls by less than $1.
D)falls by more than $1.

Question 48

Suppose that a series of decisions by banks effectively raises e.The resulting ________ in the money supply could be offset by the Fed with a "defensive" open market ________ of government securities.

A)rise,purchase
B)rise,sale
C)fall,purchase
D)fall,sale

Question 49

A $1 increase in high-powered money raises the quantity of deposits until

A)all of that increase in high-powered money is held as required reserves.
B)required reserves fall back down to zero.
C)required reserves rise back up to zero.
D)deposits rise by $1.
E)GDP rises by $1 times the income-determination multiplier.

Question 50

When the Fed buys government securities,________ and the money supply ________.

A)e rises,falls
B)e falls,rises
C)c rises,falls
D)c falls,rises
E)H rises,rises

Question 51

A stable regular relation between income and the money stock as the medium of exchange presumes that

A)no interest is paid on the medium of exchange.
B)as interest rates increase the amount of money held increases.
C)as interest rates increase the amount of the medium of exchange held decreases.
D)A and B.

Question 52

If e = 0.125,c = 0.08,and D = 720,the total demand for high-powered money is

A)32.4.
B)3512.20.
C)572.4.
D)147.6.

Question 53

Given the reserve-holding ratio e and the fraction of deposits held as cash c,the money multiplier becomes

A)ec/(e - c).
B)(1 + c)/(e + c).
C)(1 - C)/ec.
D)1 - e - c.
E)ec - (1/c).

Question 54

Financial intermediaries will be more likely to loan you the savings of other individuals than an individual because

A)they have specialists who research your credit worthiness.
B)they have contingency funds to cover loan losses.
C)they fund credit agencies to collect loan repayment information.
D)All of the above.

Question 55

The most important tool of monetary policy is ________,through which the Fed affects the variable ________ in the money-creation formula.

A)open market operations,e
B)open market operations,H
C)rediscount policy,e
D)rediscount policy,c
E)reserve requirement policy,e

Question 56

Given the reserve-holding ratio e and the fraction of deposits held as cash c,the deposit multiplier becomes

A)e - c.
B)1/(e - c).
C)e/c.
D)ec.
E)1/(e + c).

Question 57

If e = 0.15,c = 0.07,and H = 140,the quantity of deposits at full multiplier expansion is

A)1750.00.
B)13,333.33.
C)998.67.
D)636.36.
E)30.8.

Question 58

Given the bank reserve-holding ratio e and the quantity of bank deposits D,the demand by banks for high-powered money is

A)eD.
B)e/D.
C)D/e.
D)e + D.
E)D - e.

Question 59

If the level of interest rates increases,then the current value and price of a bond paying a fixed interest payment will

A)remain unchanged since its underlying value,the interest payment is fixed.
B)fall since new bonds offer higher rates.
C)rise since new bonds offer higher rates.
D)first rise then fall as bond investors calculate the effects of the change in rates.

Question 60

Money market instruments are ________ term and ________ relative to capital market instruments.

A)long;risky
B)short;risky
C)short;less risky
D)long;less risky

Question 61

The money-creation multiplier is the

A)same as the income-determination multiplier.
B)amount by which the money supply would rise with a $1 increase in the supply of high-powered money.
C)amount by which the money supply of high-powered money will increase equilibrium GDP.
D)amount by which a $1 increase in reserves would raise an individual bank's deposit liabilities.

Question 62

If there is instability in the demand for commodities,

A)a monetary policy of fixed interest rates will perform better than a policy of holding the real money supply fixed.
B)a countercyclical money-supply policy will cause large swings in interest rates.
C)a fixed money supply policy will perform better than countercyclical changes in money supply.
D)a fixed money supply policy will stabilize interest rates.

Question 63

Figure 13-3

In Figure 13-3 above,given the unstable demand for money and a stable commodity demand,a stable output level at C would best be promoted by

A)targeting interest rates by the Fed.
B)decreasing taxes.
C)increasing expenditures by the government.
D)decreasing expenditures by the government.

Question 64

Figure 13-3

In Figure 13-3 above,suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed.The range of shifts in the LM curve,LM₁ to LM₂ can then only be explained by

A)changes in the velocity of money.
B)changes in the price level.
C)changes in the demand for money.
D)A and C.

Question 65

The Fed attempts to affect the level of borrowed reserves by

A)changing the discount rate.
B)changing legal reserve requirements.
C)open market sales.
D)open market purchases.

Question 66

Figure 13-3

In Figure 13-3 above,suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed.The range of shifts in the LM curve,LM₁ to LM₂ lead to

A)an unstable equilibrium output,C to B₁.
B)a stable equilibrium output,C.
C)an unstable equilibrium output,B₀ to B₁.
D)a stable equilibrium output,B₀ to B₁.

Question 67

Figure 13-2

In Figure 13-2 above,suppose that the Fed maintains a constant nominal money supply,commodity prices are fixed,and that commodity demand is unstable ranging from IS₀ to IS₁.Equilibrium Y would then range from

A)A₀ to A₁.
B)B₀ to B₁.
C)C₀ to C₁.
D)Insufficient information.

Question 68

In the 1979-82 period,the Fed pursued a monetary policy which targeted the growth rate of the money supply.Given the effects of financial deregulation on money demand you would expect,ceteris paribus,

A)stable interest rates.
B)volatile interest rates.
C)a constant interest rate.
D)slow growth in interest rates.

Question 69

Suppose that you are the central bank president in a developing country which is predominantly agricultural.During planting season,c the proportion of demand deposits held as cash doubles,but you wish to keep the money supply constant.You may decide to

A)reduce e and/or buy securities and/or lower the rediscount rate.
B)increase e and/or buy securities and/or lower the rediscount rate.
C)reduce e and/or sell securities and/or raise the rediscount rate.
D)increase e and/or sell securities and/or raise the rediscount rate.

Question 70

The immediate impact when the Federal Reserve buys government securities

A)from banks is that the level of bank reserves will decrease.
B)from government security dealers is that the level of bank reserves and deposits will increase.
C)from government security dealers is that the level of bank reserves will increase and the level of deposits decrease.
D)from banks is that the level of deposits will increase but bank reserves will decline.

Question 71

As a result of financial deregulation

A)the IS curve became flatter and the LM curve became steeper,with the result that the interest rate became more volatile.
B)the IS curve became steeper and the LM curve became flatter,with the result that the interest rate became more volatile.
C)both the IS curve and the LM curve became steeper,with the result that the interest rate became more volatile.
D)both the IS curve and the LM curve became flatter,with the result that the interest rate became more volatile.

Question 72

"The rigid link between monetary growth and inflation ...had been broken." M1 grew faster in the deflationary 1980s than in the inflationary 1970s.Why?

A)The demand for money increased,reducing spending.
B)The demand for money decreased,due to financial deregulation.
C)The demand for money increased,as did velocity.
D)The demand for money decreased and the Fed targeted the money supply.

Question 73

In the mid-1980s,velocity "fell off the rails," growing much slower than its historical trend of 3.4 percent.Had the Fed assumed a constant growth rate of 3.4 percent and maintained a constant growth rate of money supply rather than increasing the growth rate of the money supply as it did,

A)nominal GDP would have grown more slowly as would real GDP.
B)nominal and real GDP would have grown more rapidly.
C)nominal GDP would have grown more rapidly faster and GDP would have grown more slowly.
D)real GDP would have grown more rapidly faster and nominal GDP would have grown more slowly.

Question 74

Figure 13-2

Figure 13-2 above illustrates an economy with an unstable commodity demand and two possible Fed policies,a constant real money supply or a constant interest.Which policy target promotes a stable economy best?

A)constant money supply,A₀ to A₁
B)constant money supply,B₀ to B₁
C)constant interest rate,A₀ to A₁
D)constant interest rate,B₀ to B₁

Question 75

When the Fed buys $10 million in T-bills,interest rates will ________ because the LM curve shifts ________.

A)fall;left due to the increase in the demand for money and loans
B)rise;right due to the increase in the supply of money and loans
C)fall;right due to the increase in the supply of money and loans
D)rise;left due to the increase in the supply of money and loans

Question 76

If the Fed allows the federal funds rate to fall well below the rediscount rate it is likely that the Fed will

A)lower the rediscount rate and increase c,the proportion of demand deposits held as cash.
B)raise the rediscount rate.
C)increase loans to banks.
D)decrease loans to banks.

Question 77

If both money demand and commodity demand are unstable,as many activists believe,which type of policy target would most likely lead to a stable economy? (assume no supply-side shocks,and a fixed price level)

A)money supply target
B)real GDP target
C)interest rate target
D)none of the above

Question 78

The money-creation multiplier is affected by the

A)public's demand for currency as a proportion of demand deposits.
B)bank reserve-holding ratio as a proportion of demand deposits.
C)rediscount rate applied to loans from the Fed to banks.
D)Both A and B are correct.

Question 79

Figure 13-2

In Figure 13-2 above,suppose that the Fed maintains a constant interest rate,commodity prices are fixed,and that commodity demand is unstable ranging from IS₀ to IS₁.Equilibrium real output would then range from

A)A₀ to A₁.
B)B₀ to B₁.
C)C₀ to C₁.
D)Insufficient information.

Question 80

If the Fed wishes to increase the money supply it can

A)increase reserve requirements.
B)sell securities to banks and/or the public.
C)increase the rediscount rate.
D)None of the above is correct.